Modelling multilateral trade resistance in a gravity model with exchange rate regimes

Christopher Adam and David Cobham

CDMA Conference Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: In estimating a gravity model it is essential to analyse not just bilateral trade resistance, the barriers to trade between a pair of countries, but also multilateral trade resistance (MTR), the barriers to trade that each country faces with all its trading partners. Without correctly modelling MTR, it is impossible either to obtain accurate estimates of the effects on trade of exchange rate regimes and other variables or to perform accurate counterfactual simulations of trade patterns under other assumptions about exchange rate regimes or other variables. In this paper we implement a number of different ways of modelling MTR ?both for a standard gravity model and for an extended model which includes a full range of bilateral exchange rate regimes ?notably several variants of the technique developed by Baier and Bergstrand (2006), which turn out to produce broadly similar results. We then illustrate our preferred approach by carrying out simulations of the effects of the creation of an East African currency union and the effects of a withdrawal from EMU by Italy.

Keywords: gravity; geography; trade; exchange rate regime; currency union; transactions costs; multilateral trade resistance. (search for similar items in EconPapers)
JEL-codes: F10 F33 F49 (search for similar items in EconPapers)
Date: 2007-11
New Economics Papers: this item is included in nep-ifn and nep-int
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Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:san:cdmacp:0702

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